SOFTWARE giant Microsoft has made an offer of $44.6 billion in cash and shares for internet search engine Yahoo! today, in a bit to boost its dominance in the technology industry.

The combination would also allow the two companies to put up a bigger challenge in an advertising market “increasingly dominated by one player," Microsoft said.

The proposal follows predictions that the online advertising market
will double in size to around 80 billion US dollars (£40.2 billion) by
2010.

The unexpected approach comes a year after the two companies held talks over a possible commercial partnership to challenge Google, although Yahoo! rejected merger proposals at the time because it hoped to reap benefits from an overhaul of the business.

But the suitor said today in a letter to Yahoo!’s board: “While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing.

“A year has gone by, and the competitive situation has not improved.”

The proposal comes days after Yahoo! reported a 23 per cent fall in fourth-quarter profits, signalling that economic difficulties in the US are spilling over into the lucrative online advertising market.

Microsoft said its 31 US dollar a share (£15.59) offer for Yahoo! represented a 62 per cent premium to the search engine’s closing share price yesterday.

The software giant hopes to offer a “credible alternative” to Google through the tie-up, offering greater choice to advertisers, increasing research and development spending and stripping out overhead costs.

The company aims to make one billion US dollars (£503 million) in cost savings every year through the deal.

If Yahoo!’s board agrees, the merger could be completed in the second half of the year.

But Microsoft also hinted at a hostile bid by reserving the right “to pursue all necessary steps” to win over the firm’s shareholders if the deal is opposed.

Internet search engine Google reinforced fears of a recession in the United States after disappointing fourth quarter profits and sales figures.

The technology giant reported profits of 1.21 billion US dollars (£607m) in the final three months of the year, up 17 per cent on the fourth quarter in 2006.

But the hike missed market hopes and marked the first time Google had seen quarterly profits rise by less than 25 per cent since flotation nearly three-and-a-half-years ago.

Google’s figures come just days after rival Yahoo! reported a 23 per cent fall in fourth quarter profits, suggesting that America’s economic troubles is spilling over into the lucrative online advertising market.